Year-end tax planning tips usually zero in on what advisors should be telling their clients to do, but IRA and tax expert Ed Slott of Ed Slott & Co. is offering some advice to advisors this year on what their clients shouldn't do.
As a general rule, Slott told ThinkAdvisor, advisors with clients that have large IRAs and 401(k)s should focus on long-term tax planning strategies. In short, they should prioritize adding to Roth accounts instead of maximizing their tax-deferred savings.
"These are my general guidelines for most people with large IRAs, since these IRAs will likely be subject to higher future taxes on the buildup of these balances," Slott said Wednesday via email.
"Left untouched to keep growing, these accounts are silently accruing big future tax bills, being triggered at higher rates," Slott said. "While I believe this advice will be best for most clients with large IRAs, advisors will need to have conversations with clients to see what is best for their particular situation and family estate plan."
At the least, Slott added, "advisors must address the tax bills growing in these IRAs. You cannot ignore this buildup. It won’t go away. These taxes will have to be paid. It’s not if, but when. And the 'when' is what you want to control."
ThinkAdvisor caught up with Slott to talk about other moves clients should not make by year-end.
THINKADVISOR: Clients should not beef up their 401(k) contribution? Why?
ED SLOTT: Don’t add to your 401(k) to get the tax deduction in before year-end. Some advisors ask, but what about the company match? Won’t that be lost? NO! The tax law changed on that and the company match can now go to the Roth 401(k). Plus, Roth 401(k)s are now no longer subject to lifetime [required minimum distributions].
Don’t beef up your 401(k) contribution. Why? This is short-sighted, not looking at the big long-term tax planning picture that advisors should be focusing on for clients. You’re just adding to the future tax problem.
Yes, you can get a tax deduction that could reduce your tax bill this year, but that’s a short-term gain that will be paid for in future higher taxes.
The “deduction” is not even a real deduction that you get to keep. It’s really just a temporary gain. It’s essentially a loan you are taking from the government to be paid back at probably the worst time — in retirement, when balances and tax rates may be much higher. Better option is to forgo the deduction, and the temporary tax savings, and instead put the funds into the Roth 401(k) if the plan has that, as most plans do now.
There may be an extension of the 2017 tax cuts in 2025. What should advisors tell their clients not to do in light of this?
This seems very likely, and should be taken advantage of to move more IRA funds to Roth IRAs over more years.
